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Market Volatility Continues

 

By Christopher Battifarano, CFA®, CAIA
Executive Vice President & Chief Investment Officer
Markets continue to experience extreme levels of price volatility as we are now contending with three discrete issues: 1. The risk of the coronavirus and its economic effects both domestically and abroad 2. Interest rates falling to zero and below and 3. Record low prices of crude oil.

We have no ability to predict either the extent of the spread of the virus, or when it might relent. We are operating under the pretense that it will behave similarly to other flu strains and its spread will likely abate sometime in the spring (May/June). That is how we believe markets are repricing to this risk.
Under this presumption, we are maintaining our asset allocation views and not making any drastic changes. There are pockets of value that have developed as a result of the sell off and we are seeing our external managers take advantage of these opportunities. The internal equity strategies that we manage are also opportunistically deploying capital into individual securities that we believe have dislocated from fundamentals and offer compelling value. 

We have long been advocates of portfolio diversification. The current market environment reminds us why this is a wise approach. We had gone through a long period leading up to our current market reality where volatility was running at record lows and large cap US equity returns trounced all other asset classes. While market timing can be very alluring it is an exercise in futility. Intelligent investors know sound fundamental valuation and portfolio diversification is what works long term. A portfolio diversified by strategy, security type and geography is crucial in mitigating risk.

As we mentioned in our note last week, we expected additional action by both central banks and fiscal stimulus from governments. Both of these events have come to fruition and we expect to see more action taken. While current economic fundamentals continue to look promising these metrics report on a lagged basis. If the US experiences mass closures of schools (beyond universities), religious services and sporting events akin to what has occurred in Japan and Italy, we would expect economic fundamentals to worsen.  We see both fiscal and monetary action now appropriate as both businesses and individuals will soon feel these effects. Government and central bank action today will ensure they are not on their hindfoot once these effects are realized. We believe the risk of recession in the US has risen but these simulative actions by central banks and sovereign governments help to offset some of these risks and help to provide relief to those who are feeling the effects most profoundly. They can also provide for increased economic activity once society reverts to more normal protocol and commerce resumes.

Unless your circumstances have recently changed, we would not encourage you to take any portfolio action at this time. We manage all of our clients in a completely customized mandate, based on their unique circumstances and requirements. Should you have specific questions, please reach out to your FineMark Private Wealth Advisor.  

Beyond the pure economics and market effects of the coronavirus, we recognize that you may be going through a time of angst, as this virus continues to spread. At FineMark, our commitment to serve you extends far beyond your financial needs. If there are specific areas where we can help, please contact us, and we will do whatever we can.
Trust and investment services are not FDIC insured, are not guaranteed by the bank and may lose value.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. FineMark National Bank & Trust services might not be available in all jurisdictions or to all client types.
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